Feb. 10 (Bloomberg) -- Chinese developers are building more
homes in cities across the nation away from the financial hub of
Shanghai and the capital Beijing, which may be the hardest hit
by government measures to curb property prices.

China Vanke Co., the country’s biggest developer by market
value, said an expansion into central and western Chinese cities,
including Wuhan and Chengdu, helped 2010 revenue exceed 100
billion yuan ($15 billion), a target it had set for 2014, while
Evergrande Real Estate Group Ltd. counted on towns in the
nation’s interior to boost sales.

Cheaper land and rising incomes in inland cities are luring
developers as the government targets speculators, focused on
Shanghai and Beijing, with stricter mortgage requirements and
property taxes. Land investment in less affluent cities jumped
35.4 percent in the past year, according to data from China Real
Estate Information Corp., which tracks 40 publicly traded
developers.

“Absolutely policy is a driver of this, both because the
policy’s footing in more developed cities is stricter and also
because there is tremendous unmet demand for modern housing in
these second-tier cities where incomes are rising quickly,”
said Michael Klibaner, head of China research at Jones Lang
LaSalle Inc. in Shanghai.

First-tier cities include wealthier Shanghai, Beijing and
Guangzhou, in southern China, according to China’s National
Bureau of Statistics. The second tier includes provincial
capitals and the third includes smaller cities.

Buying Land

Residential land costs in the central city of Wuhan
averaged 1,662 yuan per square meter in January, compared with
Beijing’s 4,145 yuan and 5,692 yuan in Shanghai, according to
SouFun Holdings Ltd., China’s biggest real estate website.

“Everyone agrees that opportunities lie in second- and
third-tier cities, including us,” said Yang Haisong, a Hong
Kong-based spokesman for China Overseas Land & Investment Ltd.,
a state-owned developer. “There are more cities in that
category and their home prices have more room to rise.”

Hong Kong-based China Overseas, which started expanding in
the country’s interior five years ago, posted its biggest
increase in sales volume in northern China in December. It sold
1.5 million square meters (16 million square feet), a 67 percent
jump from the same period a earlier, in the region that includes
Shenyang, Changchun, Dalian and Qingdao.

“Top cities are increasingly mature: people are actually
going to be second-, third- or fourth-time buyers,” said Wee
Liat Lee, a Hong Kong-based property analyst at Samsung
Securities Co. “If you go to these lower-tier cities, a lot of
them are first-time buyers. You are tapping into fundamental
demand, with no restrictions.”

Rising Incomes

Per capita net income in rural areas rose 10.9 percent to
5,919 yuan last year -- the biggest gain since 1984. Average
disposable income in urban areas rose 7.8 percent. China’s
economy grew 10.3 percent in 2010.

The average disposable income rose 10.4 percent in Shanghai
to 31,838 yuan and 8.7 percent in Beijing to 29,073 yuan in 2010,
compared with 13.2 percent in Wuhan to 20,806 yuan and 11.3
percent in Chongqing to 17,532 yuan, according to data from the
local statistics bureaus.

The second- and third-tier cities will remain growth
engines for developers in 2011, according to Christie Ju at
Jefferies Equity Research in Hong Kong.

“China is a combination of cities: Beijing and Shanghai,
which are equivalent to those in developed countries, and the
smaller cities, like those in emerging markets,” said Ju, head
of Hong Kong and China research at Jefferies, a New York-based
firm. “Developers realized that many people need quality
housing and not everyone lives in Beijing or Shanghai.”

Higher Rates

Still, the government has expanded property curbs to limit
the risk of asset bubbles in the world’s fastest-growing major
economy, and the central bank raised interest rates on Feb. 8
for the third time since mid-October.

“The property market is a huge bubble,” Andy Xie, an
independent economist, said in a Bloomberg Television interview
in Hong Kong yesterday. China may raise interest rates four more
times this year to curb inflation, Xie added.

“The government is trying to engineer a soft landing,” he
said. “The property market will turn.”

Vanke said yesterday it expects a “sharp” drop in sales
this month after revenue in January more than tripled to a
record 20.1 billion yuan. The company will pay close attention
to the market’s reaction to the government curbs, Tan Huajie,
the company’s board secretary, said in a statement.

China’s real estate prices rose 6.4 percent in December
from a year earlier, increasing for a 19th month, the country’s
statistics bureau said Jan. 17.

Property Curbs

Home prices rose 21.4 percent in Shanghai in January from a
year earlier, 25 percent in Beijing, 27.8 percent in Chongqing
and 16.1 percent in Wuhan, according to SouFun.

Last month, policy makers approved property tax trials on
some homes in Shanghai and the western city of Chongqing, raised
the minimum down payment for second-home purchases, and asked
local authorities to set price targets for new properties and
boost land supply.

“We believe this round of tightening is in response to
recent rises in property prices, especially in some tier-2/3
cities, and reveals the government’s low tolerance of further
rises at this stage,” said Hong Kong-based Peng Wensheng, chief
economist at China International Capital Corp., in a Feb. 1 e-mailed report.

China last year restricted loans to developers, and some
cities including Beijing limited the number of homes local
residents can buy.

‘Less Incentives’

Less affluent cities will offer more opportunities for
developers this year because they may not fully implement
government tightening policies, said Samsung Securities’ Lee.

“The local governments will have much less incentives to
really execute what the central government wants,” he said. “A
lot of these cities still rely heavily on land sales for their
funding.”

To boost sales, Shenzhen-based Vanke said it entered inland
cities such as Kunming in the south and Guiyang in the west last
year, and the smaller cities of Wuhu and Qinhuangdao in January.
Vanke’s strategy of moving into smaller cities may drive their
growth further this year, said Du Jinsong, a Hong Kong-based
property analyst at Credit Suisse Group AG, today.

Chongqing, Wuhan

Evergrande, based in Guangzhou, sold the second-most
properties following Vanke in China by volume last year, with
the sales value increasing 66.4 percent to 50.4 billion yuan
from 2009. More than 90 percent of its sales came from central
and western cities including Changsha, Chongqing, Chengdu and
Wuhan, the company said on Jan 10.

“The government’s property tightening took place in the
top cities, but our sales in second- and third-tier cities are
doing very well and drove our sales higher,” Xia Haijun,
Evergrande chief executive officer, said at a Hong Kong briefing
on Dec. 8.

In Wuhan, the new transportation hub for China’s high-speed
trains, billboards line the highway offering homes from
companies, including Vanke, Shanghai Forte Land Co., and
Shanghai Greenland Group, the developer of the world’s third-tallest building in the city. Land sales in Wuhan rose 163
percent to 78.2 billion yuan last year from 2009, according to
SouFun.

“Home prices in Wuhan were much lower compared with
Shanghai and Beijing and have more room to grow,” said Li
Guozheng, an analyst at the central China branch of SouFun in
the city.

‘Balanced Strategy’

While China Overseas is seeking a “more balanced
strategy” with expansion into smaller cities, “top cities
still command a higher margin,” said Yang.

Developers should pay attention to factors such as the
cities’ growth rates, infrastructure and job creation when
expanding, said Klibaner at Chicago-based Jones Lang LaSalle.

“It’s a decade-long process and we are still at the
earliest stage,” said Klibaner, who forecasts more Chinese
developers will expand outside Beijing, Shanghai, Guangzhou and
top-ranked tier-two cities. The trend is “in line with China’s
overall economic growth,” he said.